The author thanks two anonymous referees, Lorenzo Garlappi, Chang-Soo Kim (Editor), Jaehyon Lee (AKFAs discussant) and participants at the 2011 AKFAs Conference for helpful discussions and suggestions. A travel support from the KAFA is gratefully acknowledged. All errors are mine.
The Effects of Risky Debt on Investment Under Uncertainty†
Article first published online: 26 FEB 2013
© 2013 Korean Securities Association
Asia-Pacific Journal of Financial Studies
Volume 42, Issue 1, pages 39–55, February 2013
How to Cite
You, S. D. (2013), The Effects of Risky Debt on Investment Under Uncertainty. Asia-Pacific Journal of Financial Studies, 42: 39–55. doi: 10.1111/ajfs.12008
- Issue published online: 26 FEB 2013
- Article first published online: 26 FEB 2013
- Manuscript Accepted: 7 DEC 2012
- Manuscript Received: 18 JUN 2012
- Real option;
This paper investigates investment and disinvestment decisions when an investor finances debt to fund the lump-sum cost at the time of investment. The study examines investment timing decisions in a frictionless financial market. By extending the model presented in Dixit (1989), this paper argues that, as risky debt increases, an investor's trigger price for investment decreases while the trigger price for disinvestment increases. Such an investor hastens both investment and disinvestment decisions with risky debt. This paper focuses on stand-alone financing rather than expansion financing, as in Lyandres and Zhdanov (2010).